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Before you can pick a pricing method, you need to understand what goes into a price. A good price should reflect your costs, skill level and desired profit. Let’s go over how we can calculate such a price.
Notes
Formula for calculating your hourly rate:
- Calculate your direct and indirect expenses
Annual expenses = Sum of:
- Rent
- Utilities
- Insurance
- Employee salaries and benefits
- Advertising and promotion
- Outside professional services
- Equipment
- Office supplies
- Business taxes
- Client services
and any other expenses
- Calculate number of working hours
Working hours = (Number of working days a year - holidays - vacation time) * Number of hours worked per day
- Calculate hourly rate:
Hourly rate = (Annual Expenses + Profit Margin) / Number of working hours
[Pasan Premaratne] Regardless of the pricing method you go for, you have to establish a baseline.
0:00
The price you charge for a project should be enough to cover your expenses, billable work hours, and bring in some profit.
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Rather than just picking a random starting figure because it's what other people in the industry charge,
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calculating the best rate for you will allow you to accurately evaluate your financial progress.
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To calculate an hourly rate, start by totaling all direct and indirect expenses for the year.
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This includes things like rent, utilities, insurance, employee salaries & benefits, advertising & promotion,
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outside professional services, equipment, office supplies, business taxes, and client services.
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Next figure out the number of hours you plan to work in a year.
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Start by calculating the total number of days you want to work and the number of hours per day.
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If you're sticking to a 9-5 schedule, 5 days a week, that's roughly 251 working days a year—taking into account holidays and weekends.
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If you want to work 4 days a week, that's perfectly fine as well. You are in charge of your own schedule.
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Deduct any planned vacation time or time outside the business from this total,
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and you have a rough idea of the number of hours you will work during the year.
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Add to your total expenses a reasonable profit margin—usually anywhere between 10-15%.
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Divide this figure by the number of hours you plan on working.
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This resulting hourly rate should cover all the costs of running your own business, including your own salary.
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Say your annual expenses are around $72,000. You add a 10% profit margin of $7,200.¾
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Divide this by the number of hours you work.
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So let's say I work 241 days at 8 hours per day, which is 1,928 hours.
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Divide this $79,200—your total expenses plus your profit margin—by the $1,928 to arrive at your approximate hourly rate.
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For this example, that's $41 per hour.
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Now when calculating working hours, most professionals don't include time spent on administrative work—
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things like writing proposals, billing, and self-promotion because that's not strictly client work.
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Other freelancers use a multiplier that's unique to the project—a creativity coefficient.
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This number is a multiplier of your base rate to help you match the price you charge
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with the level of creativity and difficulty of each project.
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Creativity coefficients can be close to 1 for projects that are dead easy for you and stuff that you do all the time.
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But as difficulty or uniqueness of the project increases, so does the coefficient.
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With an hourly rate when you consider a project, you should carefully estimate the number of work hours.
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You can then multiply this rate by the hours to figure out whether the client's budget at least covers your costs.
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If it doesn't, you can negotiate with the client for a higher fee, propose a different solution for the project that takes less time,
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talk about reducing the number of features implemented, or whatever is needed to come to a mutual agreement.
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Coming up with a per project price involves roughly the same approach, but is more appropriate for freelancers who have experience.
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Say product landing pages is your specialty and that over the years you've found out that it takes you 2 weeks to do it.
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You calculated your baseline rate awhile back and found it to be $40 an hour.
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Given these numbers and some rough calculation, we can say that you should be charging $3,500.
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After doing it for awhile if another landing page comes in, you know off the top of your head that the minimum fee for this project
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should be $3,500.
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Without having to drill down into hours and cost, you can comfortably tell the client
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that it will cost them around $4,000 for the whole project.
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Per project pricing is always more attractive to clients but it comes with experience, doing this for awhile, and knowing your numbers.
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